Key Takeaways:
- Understand the reasons and mechanics behind forfeiture of shares and its accounting treatment.
- Learn the correct journal entries for both forfeiture and reissue of shares under different scenarios (at par, premium, and discount).
- Grasp how capital reserve is impacted by profits arising from reissue of forfeited shares, with step-by-step solved examples for clarity.
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Introduction to Forfeiture and Reissue of Shares
In corporate accounting, companies often face situations where shareholders fail to pay the full amount due on their shares. When such defaults occur, the company may forfeit these shares, canceling the shareholder's rights. Subsequently, these forfeited shares can be reissued to new investors. Handling these transactions accurately is critical for maintaining transparency and compliance in the company’s accounts.
Forfeiture of Shares
a. Meaning and Purpose of Forfeiture
Forfeiture of shares refers to the cancellation of shares by a company due to non-payment of allotment or call money by shareholders. The shareholder loses any amount already paid and surrenders the shares back to the company. This process reduces the company's subscribed share capital by the called-up amount of those shares. Forfeiture can only occur if the company’s Articles of Association authorize it, and after due notice is served to the defaulting shareholder.
b. Journal Entries for Forfeiture of Shares
The journal entry for forfeiture depends on whether the shares were issued at par, at a premium, or at a discount.
The core principle: Debit Share Capital with the amount called up, and credit Forfeited Shares Account with the amount received, while crediting relevant Call or Allotment Accounts with unpaid amounts. If shares were issued at a premium, and the premium was unpaid, Securities Premium Account is also debited.
| Situation | Journal Entry |
|---|---|
| Issued at Par | Share Capital A/c Dr. To Forfeited Shares A/c To Call/Allotment/Calls-in-Arrears A/c (For amount called up, amount received, and amount unpaid respectively) |
| Issued at Premium (Premium Received) | Share Capital A/c Dr. To Forfeited Shares A/c To Call/Allotment A/c (Securities Premium is not affected if already received) |
| Issued at Premium (Premium Not Received) | Share Capital A/c Dr. Securities Premium A/c Dr. To Forfeited Shares A/c To Call/Allotment A/c (Both Share Capital and Securities Premium debited if premium unpaid) |
| Issued at Discount | Share Capital A/c Dr. To Discount on Issue of Shares A/c To Forfeited Shares A/c To Call/Allotment A/c |
Reissue of Forfeited Shares
a. Meaning and Rules of Reissue
After forfeiture, the company may reissue these shares to new or existing investors. Reissue can be made at par, at a premium, or at a price lower than the face value (discount). However, the maximum discount allowed on reissue is limited to the amount originally received from the forfeiting shareholder. This ensures the company’s capital is not reduced below the minimum subscription.
b. Journal Entries for Reissue
| Situation | Journal Entry |
|---|---|
| Reissued at Par | Bank A/c Dr. To Share Capital A/c |
| Reissued at Premium | Bank A/c Dr. To Share Capital A/c To Securities Premium A/c |
| Reissued at Discount | Bank A/c Dr. Forfeited Shares A/c Dr. To Share Capital A/c |
Note: The debit to Forfeited Shares Account for discount on reissue cannot exceed the balance available in that account.
c. Treatment of Profit on Reissue: Capital Reserve
If there's a balance left in the Forfeited Shares Account after adjusting any discount allowed on reissue, this surplus is considered a capital profit. It is transferred to the Capital Reserve account and not distributed as dividends. This strengthens the company’s reserves and reflects prudent financial management.
| Situation | Journal Entry |
|---|---|
| Transfer to Capital Reserve | Forfeited Shares A/c Dr. To Capital Reserve A/c |
Example: Step-by-Step Illustration
Let's consider a practical scenario to reinforce your understanding.
Suppose XYZ Ltd. issued 1,000 shares of ₹10 each at par. A shareholder paid ₹3 on application, ₹4 on allotment, but failed to pay the final call of ₹3 per share. The company forfeited these 1,000 shares. Later, it reissued 800 of these forfeited shares at ₹9 per share (i.e., at ₹1 discount).
- Forfeiture Journal Entry
Particulars Debit (₹) Credit (₹) Share Capital A/c (₹7 called up × 1,000) 7,000 To Forfeited Shares A/c (₹7 received × 1,000) 7,000 - Reissue of 800 shares at ₹9 per share (₹1 discount)
Particulars Debit (₹) Credit (₹) Bank A/c (₹9 × 800) 7,200 Forfeited Shares A/c (₹1 × 800) 800 To Share Capital A/c (₹10 × 800) 8,000 - Transfer of profit on reissue to Capital Reserve
Amount remaining in Forfeited Shares A/c = Amount received on forfeiture (₹7 × 1,000 = ₹7,000) - Amount used for discount (₹1 × 800 = ₹800) = ₹6,200.
Particulars Debit (₹) Credit (₹) Forfeited Shares A/c 6,200 To Capital Reserve A/c 6,200
Summary Table
| Transaction | Accounts Involved | Entry |
|---|---|---|
| Forfeiture | Share Capital, Forfeited Shares, Calls/Allotment | Debit Share Capital, Credit Forfeited Shares and Calls/Allotment |
| Reissue at Par | Bank, Share Capital | Debit Bank, Credit Share Capital |
| Reissue at Discount | Bank, Forfeited Shares, Share Capital | Debit Bank and Forfeited Shares, Credit Share Capital |
| Profit Transfer | Forfeited Shares, Capital Reserve | Debit Forfeited Shares, Credit Capital Reserve |
Understanding these entries and their rationale will equip you with both conceptual clarity and practical competence—a vital asset for your academic and professional journey in commerce.